Payments broker vs ISO vs payment processor

I’ve read several articles and posts about the matter relating to various terminologies used in the payments industry. Terminology that covers different types of entities whose ultimate role is to provide merchant accounts to online businesses. A broker, reseller or an agent generally provide the same level of service. They all require a ‘side deal’ or ‘reseller agreement’ in place with a processor in order to provide a merchant account. In the US, a common term used is ISO or MSP – both are the same, as they cover Visa and MasterCard’s use of terms. In Europe, resellers/agents are more commonly used, although they are not the same as an ISO or MSP.

Payments broker vs ISO

The difference between an ISO/MSP and an agent/reseller/payment broker is basically the kind of deal they have in place with the processor, the level of risk and the cost. In some cases, the former is required to take on initial underwriting and at times take some form of risk. This comes at a cost – ISO/MSPs are required to be registered with Visa and MasterCard respectively and comes at a cost of roughly EUR5,000 per year.

None of the above are financial institutions and are not licensed to handle merchants’ funds, therefore, if you work with a reseller who states that funds from your merchant account will be wired from their own, as opposed to being sent directly from the processor or acquirer, beware! They are not licensed to do so.

So why use a ‘middleman’?

In actual fact agents, resellers or brokers are middlemen and they exist to bring new business to processors and to provide a level of service to an online business. In reality, so are processors some form of ‘middle-men’. Processors stand in between merchants (or agents) and their acquiring bank. Although acquiring banks generally don’t provide services directly to merchants, in some cases, for very large accounts they actually might. It is important to note that ‘middle-men’ at times have specific deals in place with their processor or acquirer. This means, that a merchant could potentially be getting a far better deal by utilising a middle-man rather than going directly to a processor. Agents or resellers (or brokers) do not add on to the final merchant rate to make a profit, but instead, they receive a ‘buy rate’ from their respective processors, and sell to merchants at a ‘sell rate’. In most cases, the processor dictates what the final cost must be and the agent merely takes a small cut in the form of commission. In other cases where the reputation and strength of the broker are more significant, the broker has the ability to manage their own pricing.

If a merchant were to go directly to a processor, the processor would still sell it at that same cost or at times even higher. Let’s take an example – a low risk online retail shop called myonlineshoes123.com, sell sports shoes out of the UK. The shop is a small sized business targeting the local market with revenues of GBP 10,000 monthly. A ‘middle-man’ might get a buy rate of approximately 1.5% to 2% from a processor and in turn price the final rate anywhere between 2.4% and 2.8%. If the merchant would go directly to the same processor, the final rate would still be anywhere between 2.4% and 2.8%.

So why go to a middleman? Some strongly placed agents are able to strike good deals with processors since they work in mass by bringing new merchants regularly and therefore bring good value to the processor. When agents tend to send more business to a processor, agents receive better pricing from the processor, which allows agents to price the final rate lower than the processor would do under normal circumstances. Another major benefit is that generally, agents have lower overheads in comparison to processors and therefore wouldn’t mind making less of a profit on a merchant account just to close the deal. On the other hand, when agents bring merchants to the processor, a significant amount of efforts, whether pre-sales or after-sales is done by the agent, therefore minimising the efforts required by the processor. This means that the processor would have more time on their hand to service other merchants.

This whole payments’ ecosystem is created in a way to facilitate the life of a merchant, it adds several layers of entities such as agents, ISOs, processors and acquirers to optimise the entire payments process. Each layer is specialised in specific aspects of the process and this is what makes this ecosystem functional. Unfortunately, not many online businesses are aware of this simple truth, and many believe that heading straight to the source would get a better deal, but, it is not always the case! You will probably not get that personalised service when dealing with a large PSP, and neither the best pricing. So, to all merchants out there, consider using agents rather than processors directly – you would be surprised with the service you might actually get if you pick a good one!